Vessel nomination in FOB sales contracts - no second chances?

The High Court has upheld a decision of the GAFTA Board of Appeal that an initial invalid vessel nomination by a buyer on FOB terms was not a repudiatory breach of contract in circumstances where:

1. The buyer still had sufficient time to make a valid (new) nomination; and
2. The initial nomination had not been made in bad faith.

In sales contracts on FOB terms, the seller’s obligations are limited to shipping the cargo ‘free on board’. The buyer is obliged to nominate the vessel, and to ensure it is ready for loading at the contractual loadport at the agreed time.

Facts

In The “TAI HUNTER” the two parties (the “Buyers” and the “Sellers”) entered into a sales contract for the sale of 25,000 MT of Ukrainian Corn Feed in bulk on FOB terms (the “Contract”). The headline terms of the Contract provided:

"PORT OF LOADING TO BE DECLARED NOT PRIOR 8 DAYS TO THE DELIVERY PERIOD AND LATEST UPON NOMINATION OF THE PERFORMING VESSEL. BUYERS PRESENT SINGLE DECK, SELF TRIMMING BULK CARRIER, SUITABLE FOR LOADING AT SELLER'S BERTH."

…

"DELIVERY PERIOD:

1st APRIL 2018 TO 15TH APRIL 2018, BOTH DATES INCLUDED, NO EXTENSION"

…

"PRE-ADVICE:

BUYERS SHALL SERVE TO THE SELLERS NOT LESS THAN 8 DAYS' PRE-ADVICE WITH [SPECIFIED INFORMATION ON THE NOMINATED VESSEL]”

The contract then incorporated the GAFTA 49 Form, which in turn provides:

“The Buyer has the right to substitute any nominated vessel. Buyer's obligations regarding pre-advice shall only apply to the original vessel nominated. No new pre-advice is required to be given in respect of any substitute vessel, provided that the substitute vessel arrives no earlier than the estimated time of arrival of the original vessel nominated and always within the delivery period. Provided the vessel is presented at the loading port in readiness to load within the delivery period, Sellers shall if necessary complete loading after the delivery period and carrying charges shall not apply. Notice of substitution to be given as soon as possible but in any event no later than one business day before the estimated time of arrival of the original vessel…"

The Buyers nominated the vessel "Tai Hunter" on 20 March 2018. Sellers rejected this nomination.

On 28 March 2018, the Buyers nominated a substitute vessel, the “Mariana”. Sellers did not accept this nomination.

Also on 28 March 2018, the Buyers nominated a further substitute vessel, the “Deribas”. Sellers also refused to accept this nomination.

GAFTA Board of Appeal

The disputes proceed to GAFTA arbitration, where it was held that the nomination of the “Tai Hunter” was invalid, as inter alia the Buyers had not demonstrated that the ETA they provided for that vessel was given honestly and on reasonable grounds.

The Sellers further argued that the uncontractual nomination of the “Tai Hunter” was a breach of a condition of the Contract - entitling Sellers to terminate the Contract and claim for damages.

In support of their argument, Sellers relied on The “GIRAY” [1987] 2 Lloyd's Rep 541 (referred to as “Texaco” in the Judgment) where it had been obviously physically impossible for the nominated vessel to reach the loadport during the delivery period.

The GAFTA Board of Appeal rejected this argument, distinguishing The “GIRAY” by finding that the nomination of the “Tai Hunter” was not “manifestly false”.

This led to the conclusion that the Sellers were not entitled to treat the Contract as discharged following the invalid nomination of the “Tai Hunter”.

High Court

Sellers appealed the decision to the High Court under s68 of the Arbitration Act. In his Judgment, Mr Justice Henshaw noted that:

“It is well established that where an ETA is incorporated as a term of a sale contract, there is a breach of condition if that ETA has not been given honestly and on reasonable grounds.”

This follows the position in charterparty contracts which require shipowners to state the nominated vessel’s ‘expected readiness to load’ date, as considered in The “MIHALOS ANGELOS”. In that case, Lord Denning MR held that the effect of expected readiness to load clauses is that shipowners undertake that they “…honestly and on reasonable grounds believe(s) at the time of the contract that the date named is the date when the vessel will be ready to load.”

The Court took a detailed look at the authorities on the importance of time in mercantile contracts as well as the timing and effect of vessel nomination, concluding (at paragraph 54 of the Judgment):

“In principle I am inclined to agree that, for the reasons the Sellers put forward, it is a condition of the contract that the buyer has provided a valid nomination by the requisite time, thus enabling the seller to make the necessary arrangements with the goods. It does not follow, however, that … the pre-advice obligation also imports a negative obligation, viz not to make any prior 'false' nomination…

I leave on one side the category of cases referred to in Texaco (considered below) as 'Mickey Mouse' nominations, i.e. nominations not made in good faith of vessels which very obviously could not possibly reach the loadport on time. A nomination of that kind may be renunciatory and entitle the seller to treat the contract as at an end for that reason. Those cases apart, I am not persuaded that either the case law or considerations of principle require the nomination of a vessel in good faith but, objectively, without reasonable grounds, to be treated as a breach of condition entitling the seller to bring the contract to an end even in circumstances where a valid replacement nomination could in practice still be made.”

It follows that a bad nomination made in good faith will not be a breach of condition unless a valid replacement nomination could not be made in time.

In those circumstances, it would be the failure to make a valid nomination in time which would be the breach of condition – rather than the invalid nomination itself.

Comments

The decision of the High Court helpfully clarifies the circumstances in which a seller under a FOB sale contract will be entitled to treat an invalid vessel nomination as repudiatory. This will only occur where the invalid nomination is made in bad faith, or is ‘manifestly false’. This is a high threshold to meet.

It is worth noting that the buyers in the “Tai Hunter” acted prudently in making a new nomination with sufficient time to comply with the contractual requirements. If they had insisted on the nomination of the “Tai Hunter”, or had left it too late to make a new nomination, the sellers would have been entitled to treat the Contract as discharged and to bring a claim in damages.

The Judgment underscores the importance of timely and valid vessel nominations in sales contracts, and the more general principle that not every breach will allow the innocent party to treat themselves as discharged.